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Chinese Shares Lead Asian Stocks Lower For the Week

Trade tensions and fears of a possible economic slowdown in China are weighing on yuan, markets

The Chinese flag waves in front of the Shanghai-Nantong Yangtze River Bridge in Nantong, China, in May. Trade tensions with the U.S. could shake investor confidence in the country, as its markets and currency end the week lower.
Photo:
Aleksandar Plavevski/Rex/EPA/Shutterstock

Asian markets were set to end the week lower. Stock benchmarks were mixed in morning trading on Friday, with indexes in mainland China, Hong Kong and Japan falling around 0.5% while those in Taiwan, Singapore and Australia advanced.

Friday’s Big Theme

Growing concerns about a possible economic slowdown in China, and worsening trade tensions, have weighed on the country’s currency and stocks.

What’s Happening

The Chinese yuan hit one-year lows against the dollar on Friday, after Beijing guided its official rate 0.9% lower to 6.7671 per dollar, the largest retreat in two years.

Trade conflict could hurt investment confidence in China, meaning, for example, that companies choose to locate new factories elsewhere. A weaker yuan could cause other problems, particularly for companies which operate in China but have borrowed heavily in dollars. Meanwhile, rising protectionism could prevent export-driven companies from reaping the full benefits of a cheaper currency.

Consumer stocks have fared much better, with airport operator Shanghai International Airport Co. advancing 38% this year. Companies specializing in alcoholic drinks, health care, travel and pharmaceuticals have also gained.

Market Reaction

Beijing already appears to be easing up attempts to rein in debt growth, and instead trying to reduce strains within the financial system. Analysts say more could follow.

On Tuesday, banking and insurance regulator
Guo Shuqing
called on commercial banks to take lead in lending more, at lower rates, to smaller companies. A day later, Reuters and others reported that the People’s Bank of China would boost liquidity for commercial banks, encouraging them to extend more credit and to invest in corporate bonds.

“With the worse-than-expected domestic slowdown and potential fallout from trade tensions with the U.S., we believe Beijing has little choice but to pause on its deleveraging campaign and could, albeit reluctantly, start a new round of stimulus,” economists at Nomura said in a note on Friday.

On Thursday, the Bloomberg Barclays Asia High Yield index rallied, with the spread, or yield premium over U.S. Treasury bonds, narrowing by 0.5 percentage points to 5.3%. The index is dominated by Chinese issuers.

However, Nomura’s team warned banks could be reluctant to invest in riskier bonds, even with PBOC assistance, and markets could “soon realise that forcing banks to buy high-yield bonds may not be positive for the banks’ health and market valuations.”

Elsewhere

Taiwan’s Taiex outperformed Asian peers with a nearly 1% rise. The tech-heavy benchmark got a lift from heavyweight
Taiwan Semiconductor Manufacturing Co.
Ltd., which jumped 4.7% to NT$235.00. TSMC’s forecast for third-quarter revenues was higher than Daiwa had expected, analysts at the Japanese broker said in a note. Smartphone-lens supplier
Largan Precision Co.
rose 3%.